How Does a Bid Bond Guarantee Work?

Bid Bond. Your go-to for guaranteed work in the construction sector

Whenever a project goes public, the owner looks for a construction company to complete it. Usually, the owner sets up a tender on which contractors can apply for the job. Whoever is the best gets to work on the project.

The tender can be made by a private entity or a government institution. Both follow the same route but differ in certain details. One of the most important documents that a contractor must provide, aside from the required General Contractor Liability Insurance, is the Bid Bond.

What is a Bid Bond?

By definition, a Bid Bond is a type of bond that serves to protect the project owner in the bidding process. It guarantees that the bidder will compensate the owner in the event of the inability to fulfil the duties named in the bid.

Companies obtain Bid Bonds through banks and insurance agencies like Companies, in almost 100% of the cases, work with a certain bank, and have some type of insurance in place. They usually choose the same partner to provide a Bid Bond for them.

How to obtain a Bid Bond?

The Bid Bond is a document in which the bank or insurance company guarantees that you have the required funds. This document will serve as a proof for the project owner that you’re a serious bidder.

If you opt to go through a bank, you’ll need to provide the details for the project. A staff member of the bank will go through the information and prepare the documents. Depending on factors, such as the type of project, location, and cost, amongst others, you’ll be given a price that you must pay. If the project is small, the price can be in the region of $200. Larger projects might cost you more.

What obligations does a Bid Bond carry?

The real purpose of the Bid Bond is to prove to the owner that you’re not going to back down during the project. If you do, the bond will be activated.

It means that a certain percent of the project cost will be taken by the owner. Usually, privately set tenders ask for 5% to 10% of the entire bidding sum, but federal projects can go as high as 20%.

In other words, if you bid $5 million for a particular project, and the owner asks for a 10% Bid Bond, you’ll need to provide one and have $500,000 in your bank account. If you fail to meet the agreed terms, the owner can withdraw this money.

When are project owners allowed to withdraw these funds?

All tenders have a time frame that needs to be respected. If the bidder fails to meet them, the bond will be activated. Also, if the bidder changes the terms after they are chosen, the bond will be activated, and the owner will have to hire another company for the job.

In rare cases, the contractor faces difficulties in meeting the demands of the project. The business may fail. The company might encounter serious problems that prevent them from completing the build. Whatever the reasons are, the projector owner has the right to activate the bond as the contractor couldn’t meet the agreed demands.

So, as you can see, Bid Bonds protect both the contractor and the project owner. To help you further, here are the Guidelines in Getting Your Bid Bond.

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